Refer to the information in and format of Exhibit 5—2. PMI is considering producing one product similar to the MegaBurger novelty toys but for another customer. It will ship the product to the customer immediately upon completion. The estimates for this new product follow. Assume that PMI’s cost of capital recently increased significantly, resulting in a return on sales requirement of 30 percent for all new business.

Number of units per month Sales price per unit Product life 1. Unit-level costs Vel Acquire and use materials 2. Batch-level costs 2x Set up manually controlled machines 3. Product-level costs Sul Design and manufacture molds ne Use manually controlled injectionmolding machines 4. Customer-level costs 4.1 Consult with customer 4.2 Provide warehousing for customer 5. Facility-level costs Seal Manage workers Sz Use building space Required Chapter 5 Activity-Based Management 209 Problem 5.42 Activity-Based and Target Costing

(LO 2)

24,000

$16.00 3 years 24,000 units per month; $11 per unit 12 batches per month; $600 per batch 2 molds for the 1 product (to last 3 years);

$3,000 per mold per month

$40,000 per month 24 consultations per month; $300 per consultation

$0.30 per cubic foot per month; 8,000 cubic feet 30% of production labor costs; production labor costs are $8,000 per month

$20,000 per month

a. Calculate the dollar and percentage target-cost reduction for the three-year life of the new product.

b. As the manager responsible for making the decision, would you recommend that PMI produce this product? Explain.